BRUSSELS, Feb 1 — Euro zone government bond yields rose today after the Federal Reserve left interest rates unchanged but indicated it would only cut them once there was more evidence that inflation was moving towards its 2 per cent target.
Euro area inflation data - due at 1300 GMT (9pm in Malaysian time) —remains in focus after German figures surprised to the downside.
Euro zone government bond yields dropped yesterday after mixed economic data and unexpectedly dovish comments from European Central Bank policymaker Joachim Nagel.
Germany’s 10-year government bond yield, the benchmark for the euro area, rose 3.5 basis points (bps) to 2.20 per cent. It was down more than 11 bps the day before, in its biggest daily fall in months.
Federal Reserve Chair Jerome Powell—speaking after the end of a two-day policy meeting—declined to declare victory in the two-year inflation fight and vouched that it had achieved a sought-after “soft landing” for the economy.
“We believe it will take a bit longer for the Fed to accumulate more evidence on inflation and get more clarity on how monetary policy transmission works its way through to the economy,” said Anna Stupnytska, global economist at Fidelity International.
“The Fed is unlikely to be in the rush to cut until June, and once the cutting cycle starts, it will not be on autopilot - the pace of cuts will crucially depend on the growth/inflation mix at the time,” she added.
ECB euro short-term rates (ESTR) forwards priced in a policy rate reduction of around 145 basis points (bps) in 2024 from 150 bps late yesterday. They priced a 90 per cent chance of a 25 bps cut by April 2024, after fully pricing it the day before.
The Bank of England will announce its rate decision and publish the meeting minutes today at 1200 GMT (8pm in Malaysian time).
Analysts argued that the BoE policy meeting flew under the radar as markets focused on ECB comments and inflation data.
“This potentially creates the conditions for a volatile market reaction, with the direction likely set more by what the (BoE’s) Governor says,” said Citi in a research note.
Britain’s central bank looks set to keep interest rates at their highest in nearly 16 years on Thursday, but investors will look for hints of rate cuts to come.
The Italian government bond 10-year yield—the benchmark for the euro area’s periphery—was up 4.5 bps at 3.77 per cent. The gap between Italian and German 10-year yields rose to 157 bps, its widest level since Jan. 23.
Bond prices of highly indebted countries have benefited from expectations of a quick monetary easing and the ECB’s gradual wind-down of the Pandemic Emergency Purchase Programme (PEPP) reinvestments announced in December.
Bond prices move inversely with yields. — Reuters